STUDIES Andrea Elekes Cohesion and/or Growth? Regional Dimensions of Convergence and Growth in Hungary SUMMARY: Convergence and territorially balanced economic growth require faster economic growth in weaker regions. It is dif- ficult to decide what measures would strengthen the growth capacity of regions most. Following a brief review of growth the- ories and the growth and catch-up performance of the Hungarian economy, the study focuses on the differences in develop- ment across regions in Hungary. Both the analysis of available statistical data and the calculations in connection with the catch-up rate show that the Hungarian regional development is strongly differentiated, and the so-called centre–periphery relationship can clearly be identified. Growth factors (e.g. human capital and R&D investment, innovation) should be enhanced simultaneously. Cohesion policy can complement and support growth objectives in many areas. Moreover, through the coordination of the innovation and cohesion policies even the trade-off problem between efficiency and convergence may be reduced. KEYWORDS: regional convergence, growth, cohesion, crisis JEL-CODES: F43, R11, R12 Convergence and territorially balanced eco- will be discussed next. The third part focuses nomic growth require a faster increase in on the differences in domestic regional devel- income, employment and economy in weaker opment, primarily through an analysis of the regions than in stronger ones. However, it is statistical data regarding the factors identified rather difficult to decide what measures would in the theoretical section. strengthen the growth capacity of regions Following the mapping of domestic regional Cmost. development, the question arises what role This study is, therefore, essentially searching cohesion policy may play in convergence and in for answers for the following questions. What a more balanced development. Namely, cohe- factors determine regional growth? What pic- sion policy may complement and support indi- ture does Hungary and its regions show in this vidual Member States’ growth (and employ- field? What effect did the crisis have on the ment) objectives in a number of areas, as one of performance of regions, and how does it affect its most important targets is real convergence, future prospects? In order to answer these i.e. making the less developed regions catch up. questions, the first part of this study attempts However, much depends on the efficient utili- to identify the factors that determine regional sation of resources, and this efficiency raises a growth by providing a brief overview of the fundamental question: supporting excellence main growth theories. The growth and conver- (the best developing regions) or balanced gence performance of the Hungarian economy development results in the highest efficiency? 108 STUDIES FACTORS THAT DETERMINE REGIONAL However, if technological change is at least GROWTH partly determined by an endogenous process (e.g. it depends on levels of knowledge), then Identifying the factors that determine growth is the ability of a region to benefit from techno- difficult because there is no exclusively accep- logical change through diffusion may be much ted growth theory (the validity of one theory slower if there are interregional differences in does not necessarily mean that another one is knowledge stocks (Harris, 2008). This has led wrong). In the course of time, theoretical and to the development of technology-gap models empirical researches identified a number of where regions that lag furthest behind the growth factors (Erdõs, 2003). Their review and technology level of the most advanced regions systematisation alone constitute a serious task; are presumed to experience the fastest rate of therefore, this article can only focus on the catch-up and thus the fastest rate of growth in presentation of the main features of the most total factor productivity (TFP). These models important theoretical schools (see Table 1). suggest that differences in TFP are likely to be In neoclassical growth models, growth is attrib- the main driver of persistent regional growth dis- utable to supply side factors (territorially identi- parities. cal, exogenous technology as well as capital and According to the E-convergence1 theory labour). In view of the assumption regarding (Barro – Sala-i-Martin, 1995), which rests on the declining return on capital, the productivi- neoclassical foundations, all regions converge ty growth of regions with relatively limited (or do not converge) to one single equilibrium capital supply is faster, while that of regions value. Enhanced models (convergence clubs, having a high capital/labour ratio is slower (the conditional convergence, application of time growth stimulating effect of capital accumula- series etc.) attempt to handle the problems of tion is limited). Therefore, if there is an equi- the basic model. The latest neoclassical models librium, the growth rate of productivity will be already strive to take into account the differ- balanced across regions, and will equal the ences across territories as well, and thus the exogenous rate of technological development. clubs or groups of regions may head towards Table 1 FACTORS THAT DETERMINE REGIONAL GROWTH Features, Competition Scale Convergence/growth Source of growth model yield Neoclassical Perfect Permanent Only equilibrium TFP* Kaldor Imperfect Increasing Different growth paths Exogenous increase in demand New neoclassical Perfect Permanent More equilibrium value (clubs) TFP Endogenous growth Monopolistic Increasing Different growth paths TFP (intensity growth of physical capital, human capital accumulation and increase in productivity) New economic Monopolistic Increasing Different growth rates, Export base, agglomeration effects geography different growth paths; Permanent centre-periphery disparity in regional development Note: TFP: total factor productivity Source: own editing 109 STUDIES different growth rates. However, the E-conver- growth functions). However, caution is war- gence models only refer to the fact of catching ranted by the fact that the growth in accumula- up (or lagging behind), without explaining the tion and productivity is endogenous. Rodrik territorial differences in development. (2001) mentions the following among the sec- Kaldor’s regional growth models, elaborated ondary factors that determine growth: integra- in the 1970s, already assume an increasing scale tion and openness (trade), culture and institu- yield, with a feedback between output and pro- tions. ductivity growth (Verdoorn relation2). The Following the publishing of the new trade main driving force of regional output is the theory (Krugman, 1980; Krugman – Venables, exogenous demand for the export base (the com- 1990) and the new economic geography models petitiveness of differentiated products and (Krugman, 1991; Krugman – Venables, 1995; services based on quality), and individual Baldwin et al., 2003), the determining role of regions may follow entirely different growth the territorial dimension in economic develop- paths. ment gained increasing recognition.4 Although According to the endogenous growth theory, the primary focus of the theory of economic technological development is not exogenous, geography is the territorial distribution of pro- and increasing scale yield has to be assumed duction, there are growth aspects as well. because of the externalities (Romer, 1986; The new trade theory postulates monopolis- Lucas, 1988; Aghion – Howitt, 1998 etc.). Due tic competition, increasing scale yield and dif- to the increasing scale yield, the per capita out- ferentiated products. In the interest of min- put growth is no longer limited, and the region- imising transportation costs and easier access al or national convergence of per capita to markets, corporations settle in the vicinity incomes is not inevitable either. The second of the large consumer markets. At the same wave of endogenous growth models (Romer, time, this also means that the given region 1990; Grossman – Helpman, 1991 and Aghion exports products for which there is relatively – Howitt, 1998 etc.) already takes account of high domestic demand (this is the so-called the microeconomic environment of corpora- domestic market effect). It is worth mention- tions. The accumulation of knowledge through ing that in this case increasing scale yield is not research and development is a costly process, necessarily technology based. Concentration is which only pays off if corporations have mar- much more driven by territorial externalities. ket power. These models; therefore, break New economic geography extends the new away from assuming perfect competition, and trade theory, and examines the reasons for the assume monopolistic competition.3 geographical concentration of new industries. Total factor productivity captures not only While the size of the domestic market is an the technical efficiency level of the economy, exogenous factor in the new trade theory (fun- but also its allocation efficiency (i.e. the effi- damentally because it is assumed that labour is ciency of the distribution of resources available not mobile), in the new economic geography for the country across various economic activi- approach it is already endogenous, mainly ties) (for details see Boulhol et al., 2008). because of the assumption regarding the mobil- Therefore, the increase in per capita output is fun- ity of labour, and partly because it allows damentally determined by three factors: the greater